“Brazil’s biggest cyclical challenge is to get rid of the strength of the real,” O’Neill, 54, said in an interview in London today. O’Neill, who created the BRIC acronym in 2001 to describe the emerging markets of Brazil, Russia, India and China, said the currency needs to lose a fifth of its value to be “sustainable.”

The real strengthened 8.7 percent in the first two months of the year against the U.S. dollar, the most among the 16 most- traded currencies tracked by Bloomberg. Since the start of this month, when Brazil boosted efforts to contain the rally, it was the worst performer in the world, falling 5.2 percent, including today’s 1.1 percent drop.

A stronger currency hurts exporters by making goods more expensive in dollar terms. Brazil today introduced its latest measure to stem capital flows into the country, extending a 6 percent tax on foreign loans and bonds issued abroad to include lending with a duration of as much as five years. The tax, which originally applied to foreign borrowing of up to two years, had already been extended on March 1 to include a duration of three years or less.

‘Monetary Tsunami’

President Dilma Rousseff last week pledged to take all necessary measures to shield the economy from a “monetary tsunami” caused by what she said were efforts by Europe and the U.S. to “artificially devalue” their currencies.

Investors and exporters have poured $15.5 billion into Brazil since the beginning of the year, contributing to gains in the currency, compared with an outflow of $3 billion in the fourth quarter of 2011, according to the central bank’s website.

Central Bank President Alexandre Tombini’s March 7 decision to cut the country’s benchmark Selic interest rate by 75 basis points, or 0.75 percentage point, to 9.75 percent was “good,” O’Neill said. At 4.28 percent, Brazil’s inflation-adjusted rate is the highest in the Group of 20 nations after Russia, according to data compiled by Bloomberg.

The real fell to 1.8093 per U.S. dollar at 4:10 p.m. in Sao Paulo, from 1.7912 on March 9. The currency reached a 12-year high of 1.5290 per dollar in July 2011.

Imports

The currency’s strength erodes the competitiveness of Brazil’s manufacturers and spurs demand for cheaper imports. Car imports surged 30 percent last year, accounting for 23.6 percent of vehicles licensed compared with 18.8 percent in 2010. Industrial production fell 3.4 percent in January from a year ago, the most since September 2009.

To stem the currency’s rally, Brazilian policy makers in the past two years have raised taxes on foreign investors in the local fixed-income market, boosted costs for domestic companies to borrow abroad, lowered the benchmark interest rate and imposed a tax on trading currency derivatives.